Obama's student loan plan to provide relief

Changes could save money each month for borrowers

by Kimberly Hefling - Oct. 26, 2011 12:00 AMAssociated Press

WASHINGTON - Millions of student-loan borrowers will be eligible to lower their payments and consolidate their loans under a plan President Barack Obama intends to announce today, the White House said.

Obama will use his executive authority to provide student -loan relief in two ways.

First, he will accelerate a measure passed by Congress that reduces the maximum repayment on student loans from 15 percent of discretionary income annually to 10 percent. The White House wants it to go into effect in 2012, instead of 2014. In addition, the White House says the remaining debt would be forgiven after 20 years, instead of 25. About 1.6 million borrowers could be affected.

Second, he will allow borrowers who have loans from both the Family Education Loan Program and a direct loan from the government to consolidate them into one loan. The consolidated loan would be up to a half percentage point less. This could affect 5.8 million more borrowers.

Education Secretary Arne Duncan told reporters on a conference call that the changes could save some borrowers hundreds of dollars a month.

"These are real savings that will help these graduates get started in their careers and help them make ends meet," Duncan said.

Obama is expected to unveil his plan at a stop in Denver. The White House said the changes will carry no additional costs to taxpayers.

Last year, the Democratic-controlled Congress passed a law that reduced the cap and moved all student loans to direct lending by eliminating banks as the middlemen. Before that, borrowers could get loans directly from the government or from government-backed loans in the Family Education Loan Program that were issued by private lenders but basically insured by the government. The law was passed along with the health-care overhaul with the anticipation that it could save about $60 billion over a decade.

Today, there are 23 million borrowers with $490 billion in loans under the Federal Family Education Loan Program. Last year, the Education Department made $102.2 billion in direct loans to 11.5 million recipients.

Outside of mortgages, student loans are the No. 1 source of household debt, the White House said.